Investors Look Beyond Baxter's Stumble for Upside

Sometimes, even good companies stumble, creating opportunities for investors. For those willing to look beyond past headlines to future growth opportunities, there's money to be made. And at Baxter International (NYSE:BAX), nearly $1 billion in charge-offs tied to its recalled COLLEAGUE infusion pump has created such an opportunity.

Investors have re-embraced healthcare this quarter as they reduced risk ahead of the notoriously troublesome summer. In Q2, the Healthcare ETF (NYSEARCA:XLV) has returned an impressive 6.59% while the S&P 500 has dropped 3.5%. And Baxter is up 12% this quarter as investors begin looking beyond the COLLEAGUE overhang toward future growth.

In 2010, Baxter's revenue rose 4% despite its troubles. And, in Q1, sales rose another 12%. The majority of its growth came in the United States, where sales were up 32% thanks to higher post-recession hospital spending.

Baxter's newly minted Medical Products segment, born in its post-recession restructuring, saw the fastest sales growth, with Q1 revenue rising 20.2% year-over-year to $1.86 billion. The segment accounted for $7.4 billion in 2010 sales and includes kidney, injectibles and IV-related products. While kidney products are the largest contributor to sales, accounting for 32% of segment revenue last year, they grew only 1% in the quarter. Instead, growth came from global injectibles, where sales were up 15% to $517 million, and IV therapies, where sales rose 9% to $428 million.

Baxter's other segment, bioscience, generated $5.6 billion in 2010 and $1.4 billion in Q1 sales, rising 3% last quarter despite flat results from recombinants, the segment's largest contributor, which accounted for 37% of 2010 segment sales. Driving the upside was its regenerative medicine product line, where sales increased 18% to $140 million in Q1 thanks to Actifuse -- a bone graft material the company picked up when it acquired Apatech -- and Floseal, which is used to control bleeding. The segments antibody therapy products also saw double-digit growth, rising 16% to $374 million.

The slower growing kidney and recombinants products provide significant free cash flow, which reached $2 billion in 2010, up from $1.6 billion in 2008. This cash is fueling shareholder-friendly acquisitions, share buybacks and dividends. In Q1, Baxter bought back 12.4 million shares and it has $2.4 billion remaining on its buyback authorization.

One of the most interesting opportunities for Baxter is in its Gammagard Liquid, used to treat patients with primary immunodeficiencies. Baxter is actively testing Gammagard as a treatment for Alzheimer's, which is the sixth leading cause of death and affects 5.4 million people, and for multifocal motor neuropathy, which affects one in 100,000 people worldwide.

Additionally, Baxter's CD34+ stem cell phase III trial for chronic myocardial ischemia should initiate this year. Baxter also received orphan drug designation for its treatment for von Willebrand disease, which it expects to enter phase III trials this year. Overall, the company has 14 programs in phase III trials.

With a solid pipeline of new products and ongoing cash flow from well established lines including renal, Baxter is positioned for upside as global populations expand and emerging markets develop, providing new opportunities for care across under-served regions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAX over the next 72 hours.

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